Market risk- the talked about and the tail

1. Debt ceiling-VERY talked about. The fallout of not raising it is not completely certain as I mentioned in my last blog.

2. Taper-EXTREMELY TALKED ABOUT -This is discussed so much that it would normally cease to be important but 85billion/month in security purchases is very important. There is a potential slowing of purchases, the potential end of purchases and when OR even the expansion should economic numbers disappoint. We disagree with Bill Gross who is mainly focused on the Fed Funds rate. The shape of the yield curve and the implications for mortgage rates, banks earnings and housing is very important and the amount and direction of QE/Taper will hurt or help the financial markets.

3. Mortgage REITS funding via REPO- This is a TAIL as it is not on the radar screen of many firms-Here is the excerpt from Market Watch-

Looking at the big picture, there’s concern among officials about the possible systemic risk posed by mortgage REITs and other entities that use repo markets for short-term funding. A new financial-stability report from the International Monetary Fund cited vulnerability to risks from rising and volatile rates if collateral is liquidated, leading to fire sales and funding interruptions, among other problems.

“Given that the repo funding of the two largest mREITs is comparable to Lehman Brothers’ precrisis repo book, at the very least the mREITs point to a microcosm of fragilities in the shadow banking system that deserve closer monitoring,” according to the IMF.

A separate report from U.S. regulators reported similar findings, according to the Financial Stability Oversight Council, a federal watchdog created by the Dodd-Frank bank-reform bill.

“A shock to agency REITs could induce repo lenders to raise margins or pull back funding, which in turn could compel agency REITs to sell into a declining market, potentially impacting MBS valuations significantly,” the FSOC’s report says.

It is worth at least a discussion at your next investment committee meeting.